Tuesday, October 25, 2011

The Declining American Standard of Living

    If you want to understand why this is happening-read James Galbraith! I can't recommend this highly enough. There are no doubt many good sources and authors to read. I, in case you can't tell by how often I mention him, am a big fan of Krugman. Reich is also very good, and you never go wrong reading Think Progress, the Economic Policy Institute or the Tax Policy Institute. In this regard I do actually quite enjoy some of the new so-called "Market Monetarists" though they are conservatives, they are very thoughtful and worth reading. At the present there is a convergence between them and the New Keynesians-Krugman, Brad DeLong, etc-on the matter of monetary policy. While some so-called Keynesians may see monetary policy as less important than fiscal policy this is a mistake.

  This brings us to Galbraith. If you want to really understand not just what happened but how it happened and how we might actually be able to reverse it, he is your man. As we mentioned the importance of monetary policy, this is what is important about Galbraith as well. In his 1997 book "Created Unequal" he argues that what was responsible more than anything for the stagnation of median American income was the Fed moving off its policy of Full Employment in favor of inflation fighting. While this book was only written in 1997 it is even more relevant today.

   At the time it was written in the late 90s most Americans were less receptive as times  were good for many and at least decent for many more. At that time we still could take refuge in the illusion that the American Dream was still working as it always had done in the postwar era. Most Americans still could believe that we were still a middle class nation. It wasn't until the Bush years that it became clear just how much this was no longer the case. For this reason, Galbraith's work is more relevant now than it was even then. Only now do we see the fruits of not heeding him. I haven't yet finished the book but already on just pg. 80 it is clear to me that this is the analysis I've been looking for in really knowing how we got here; only by doing so is there any hope in solving the problem. One interesting kink right now that I will get into in more detail later is how different his model is-it's Keynes's model of course-from the neoclassical model which presumes perfect competition. With the idea of monopoly power as a strong force in markets it gives us a very different type of analysis. Note that the term monopoly isn't wholly pejorative here, mostly it's just descriptive. Without getting too into it yet-wait till I finish for that!-even on the intuitive level it makes sense.

     After all isn't it logical that the goal of a company is not "competition" but dominance-ie, monopoly? His idea-again he gets it from Keynes-that a company's profit is a product of their relative monopoly power is very interesting to consider next to the standard perfectly competitive markets assumed by neoclassical models. To be sure, it is not only Keynesians who have suggested a model with less than perfect competition-Schumpeter was another very notable one to do so.

   For more on Galbraith's discussion about income inequality