Division Street America

The End of Normal: The Great Crisis and the Future of Growth BY James K. Galbraith. Simon & Schuster. Hardcover, 304 pages. $26.

“Normal” is forever a relative concept, but, as James K. Galbraith surmises in his ambitious new book, the taken-for-granted background conditions of mass prosperity in America seem increasingly to be a dead letter. The latest forecasts put the US economy on track to grow at an anemic 1.7 percent in 2014. The official unemployment rate, 6.1 percent at this writing, is almost back to normal—or, you know, “normal.” But economists estimate that if discouraged job seekers were included in this statistic, the real number would be 9.6 percent, and the jobs the recovery has created are overwhelmingly in the low-wage sector. Over the past decade, median wages were flat, and the net worth of the median household plunged by 36 percent. It’s little wonder that a poll taken earlier this year found that 57 percent of Americans believe we’re still in a recession—even though it officially ended in June 2009.

Despite the rising tide of economic insecurity, politicians on both sides of the aisle continue to burble optimistically about “expanding opportunity”—the phrase provides the title of Paul Ryan’s new “anti-poverty” program and also pops up frequently in the speeches of President Obama. But a growing number of economists and public intellectuals are beginning to question whether our economy has the infinite capacity to produce such opportunities in the first place.

Last year, the libertarian economist Tyler Cowen published a book called Average Is Over, which predicts the advent of a high-unemployment, high-inequality society in which the middle class is wiped out and a wealthy, highly educated overclass dominates the low-wage masses. It’s a chilling portrait, but give Cowen credit: He doesn’t sugarcoat it. The New York Times’ Thomas Friedman, on the other hand, emphasizes what he regards as the bright side of our emerging, Darwinian, winner-take-all economy. In a series of columns devoted to the “average is over” theme, Friedman sounded positively giddy about the imminent apocalypse. Citing the millions of manufacturing jobs that were destroyed over the past decade, he jauntily noted, “And you ain’t seen nothin’ yet.” The upside for anxious workers seeking “a decent job that can’t be digitized” is that they now can enjoy the opportunity “to find their unique value-add, their ‘extra,’ and be constantly reengineering themselves.” Friedman has advised readers that “building” your “branded reputation” will do the trick.

On the Left, labor historians Jefferson Cowie and Nick Salvatore have written that the New Deal did not, as has often been assumed, represent the “linear triumph of the welfare state.” Rather, they argue, the postwar period and the declining economic inequality that characterized that era might be more properly understood as “the long exception” in American history. Thomas Piketty has sounded an even more pessimistic note with his now-famous argument that, absent extraordinary government intervention, economic inequality will continue to spiral, because the rate of return on capital is likely to outpace the rate of economic growth. A future society increasingly dominated by what he calls “patrimonial capital”—inherited wealth—may well be our fate.

Galbraith’s study marks another sharp and suggestive installment in the ongoing effort to determine how and why our economic and political leaders have lost their once-confident grasp of sound strategies to promote macroeconomic growth. And to restore a measure of that lost confidence, Galbraith, a University of Texas economist, lays out a bold intellectual agenda. Analyzing the economic history of the past half century, he diagnoses what brought on the financial crisis of 2007–2008; explains why the economy never fully recovered from that collapse; and proposes a policy framework to confront our country’s new economic reality. He also offers a sweeping critique of the economics profession—the source of many of the dubious ideas that helped wreck the economy in the first place.

It’s an ambitious project, but one that Galbraith is unusually well positioned to carry out. Galbraith has a long and honorable history of championing heretical ideas that eventually find wide acceptance among mainstream economists. In the ’80s, he attacked the Federal Reserve’s high interest rates and the now-discredited notion, promoted by Milton Friedman and his acolytes, that inflation would inevitably rise if the unemployment rate fell below a certain level.

Galbraith studied the problem of soaring economic inequality in the ’90s, long before such concern was fashionable. In his 1998 book Created Unequal, for example, he broke with conventional economic wisdom about the problem, arguing that, contrary to what neoliberal economists like Larry Summers were saying, rising inequality was not the result of technological forces over which we have little control. Instead, Galbraith showed that the scourge of inequality came about via deliberate policy decisions such as trade agreements, the Fed’s high interest rates, and the failure to boost the value of the minimum wage.

In The End of Normal, Galbraith extends the reach of his past work by examining the constellation of factors that created the high-growth, full-employment economy we came to see as “normal” in the first place. As he succinctly explains it, the United States “enjoyed a quarter century of postwar expansion because of stable governing institutions, cheap resources [e.g., oil], the military security provided by nuclear stalemate in the Cold War, and high confidence . . . bolstered—in a minor way, but nevertheless—by the academic construct of the theory of economic growth.” This last development largely refers to the models of capitalist growth advanced by Robert Solow and other economists in the late ’50s—ideas that still rank among the profession’s most cherished shibboleths. Galbraith, naturally, takes aim at them. As he explains, these extremely popular models were simplistic and flawed. Moreover, the booming economy of the postwar years conditioned many Americans to believe that “growth was not only desirable but also normal, perpetual, and expected.” Yet, as Galbraith shows, growth was uneven from the ’70s on, and propped up by dubious policies such as deregulation, tax cuts, and war spending. Increasingly, the US economy was kept afloat by bubbles: the tech bubble of the ’90s, the housing and credit bubbles of the aughts. Then came the Great Recession and the not-quite recovery.

What was it that caused the economic downturn, exactly? In his analysis of the collapse, Galbraith parts company not only with free-market conservatives, who blame government-sponsored mortgage programs, but also with liberal neo-Keynesians such as Paul Krugman. The problem with the neo-Keynesian accounts, says Galbraith, is that they assume that sufficient stimulus will bring the economy back to life.

Galbraith argues that the conditions for a Keynesian revival no longer exist. While he acknowledges that the 2009 stimulus helped prevent the economy from going into free fall, he claims that the legacy of New Deal and Great Society programs played a far bigger role. In addition, he suggests that the structural shifts in economic production under conditions of rapid technological change and globalization have made it harder for direct stimulus measures to promote robust job creation. He may well be right to contend that government intervention alone won’t bring back a full recovery of demand—but since by his own admission federal spending helped rescue the economy, his dismissal of Keynesianism is not entirely convincing. Fiscal remedies may be less powerful than in the past, but that doesn’t make them unimportant.

To explain what caused the financial meltdown, Galbraith introduces the reader to an economist whose ideas are a better match with the conditions leading to the 2008 collapse: the late Hyman Minsky, who specialized in the structure of financial crises. Minsky theorizes that during periods of sustained growth, investors have a strong tendency to seek out higher rates of return. This leads to speculation in financial markets, which will increase until the entire system comes crashing down. Contrary to mainstream economics, which assumes an equilibrium growth path, Minsky’s point is that instability in financial systems is a feature, not a bug. While we should prepare for downturns, prudent financial regulation can limit speculation and prolong economic growth, albeit not indefinitely.

The benefit of Minsky’s model is that it helps explain certain key trends that accelerated the crisis, such as widespread fraud. Galbraith notes that although fraud was a prominent feature of the financial crisis, few economists have analyzed its role. Drawing on the work of institutionalist economists such as his late father, John K. Galbraith, he emphasizes that firms can be corrupted from within. As Minsky had predicted, opportunities for legitimate profits dried up and speculation increased in financial markets—and, as a result, so did fraud. Authorities were well aware of how pervasive fraudulent practices were in the credit sector, yet government regulators did nothing to stop it. A quarter of a century ago, more than a thousand Wall Street traders served prison sentences as a result of crimes committed in the savings-and-loan scandal. But today, our government has grown so indifferent to fraudulent activity in the financial sector that, to date, only one banker has been prosecuted by the feds for wrongdoing in the 2007–2008 crisis.

Minsky’s insights can help us minimize the damage caused by these crises. But Galbraith’s analysis suggests that we are unlikely to revive a high-growth, full-employment economy. Obstacles precluding a return to “normal” include high energy costs, the decline of the United States as a military and financial power, massive job losses brought about by technological change, and the diminishing returns of a bubble-driven economy fueled by financial speculation.

Our best bet, Galbraith contends, is to consciously pursue a path of slow growth. The aim of such a policy would be to increase stability in the financial system and deliver basic human services like education and health care in a sustainable fashion. Toward that end, he calls for a “qualitatively different form of capitalism.” This would mandate a dramatically downsized military, an expanded set of social-insurance programs, stronger labor standards, and a more decentralized, labor-intensive economy. Breaking up the big banks and shifting the tax burden from labor to the income deriving from economic rents such as land, oil, and intellectual property are other important items on his agenda.

This program has much to recommend it—as does the broader analysis in The End of Normal. Disappointingly, however, Galbraith never addresses one crucial question: What are the political prospects for enacting the comprehensive reforms he proposes? In a country dominated by neoliberal Democrats on one end of the spectrum and neofeudal Republicans on the other, more sweeping ideas from the economic Left have become marginalized. Nothing short of a mass movement is likely to create the kind of political pressure needed to institute significant changes. As the economic fortunes of so many Americans continue to decline, it becomes increasingly urgent to begin piecing together such a movement. In the meantime, we are largely left to follow Thomas Friedman’s advice, frantically building our brands, enhancing our “value-adds,” and hoping for the best.

Kathleen Geier is a Chicago-based writer who has written for The Nation, The Baffler, Washington Monthly, and other publications.