The GFC, the Great Recession and three structural changes in the US economy

from Edward Fullbrook
In recent publications three different but related structural changes in the US economy have been identified as primary causes of the Global Financial Collapse and the Great Recession.

In their book The End of Influence, Brad Delong and Stephen Cohen emphasize the importance of the shift from manufacturing to financial services. They write:
the United States has half-consciously re-shaped its economy. The country shifted some 7 percent of its GDP out of manufacturing and added some 7 percent of GDP in the expansion of finance, insurance, and real estate transactions. . . . The communities of engineering practice and innovative technological development do move and emerge elsewhere as you shift labor from real engineering . . . into financial engineering . . . . It also means that you must create more and more debt so that other nations have the dollars to accumulate and not balance their trade—and yours.
In his recent paper in Real-World Economics ReviewThe triumph – and costs – of greedClive Dilnot identifies the change in “the modes of accumulation pursued across the banking industries” including “counter-productive incentive structures” and “structures of irresponsibility” as a primary causal factor. [emphasis added] His paper
looks at the structure of accumulation that developed on Wall St and in the City and it analyses the problems of the operative logic of this ‘temporary growth regime’ and its costs and consequences—cognitive one might add, and moral, as well as economic. In particular it tries to look at this (disastrous) mode of accumulation not in terms of universal ‘laws’ but in terms of forces, of the dynamics of accumulation, coming out of and responding to particular economic and political conditions and resulting in a ‘growth regime’ that is un-precedented in certain of its features and by no means understood, even by its principal actors (and let alone by economists).
Dilnot concludes:
The real problem therefore is . . . our effective shift into a mainstream economy dominated by models of wealth extraction and not wealth-creation and characterized by the pursuit of modes of accumulation focused on dispossession, diversion and extraction.
Last night’s post on this blog by Dean Baker identifies a third structural cause: the program of upward redistribution of income and wealth begun under President Regan. Baker begins: “The roots of this economic crisis are very much centered in the growth in inequality over the past three decades.” He goes on to argue as follows.
In the three decades after World War II, there were no notable bubbles in the economy. Productivity growth translated into wage growth, which in turn led to more consumption. The increased demand led to more investment, productivity growth and wage growth.

This virtuous circle was broken by Reagan-era policies intended to weaken the power of ordinary workers. Wages no longer kept pace with productivity growth, eliminating the automatic link between productivity growth and demand growth. This led to excess capacity in the economy, which was filled in the 1990s with demand generated by the stock bubble and in the 2000s with demand generated by the housing bubble.
I accept all three of these structural changes:

  • the shift from manufacturing to financial services,
  • the change in the modes of accumulation pursued across the banking industries, and
  • the upward redistribution of income and wealth,

as being of primary explanatory importance for the GFC and the GR. But their mutual and obviouisly interdependent existences argue that a larger story of the calamitous effects of structural change in the US and other economies urgently needs to be told.
The Dilnot paper, as well as Dean Baker's article linked above should also be read

Stephen Cohen - What Happens When Other Countries Have the Money

Conversations host Harry Kreisler welcomes Professor Stephen S. Cohen for a discussion of the new book he has written with Professor Brad Delong entitled The End of Influence. Professor Cohen argues that the 2008 economic collapse demonstrates the failure both domestically and internationally of neo-liberal economic policies embraced by both democrats and republicans during the last three decades.

Three videos that show the increasing disparities of wealth, and the impact they have.