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The cult of the free market has dominated economic policy-talk since the Reagan revolution. But in practice, what we have now is a corporate republic that diverts public cash into private hands. Galbraith shows why free market principles no longer apply to our real economy. A timely, provocative work whose message will appeal to the broad audience of thoughtful Americans who wish to understand the forces at work in our economy and culture and who seek to live in a nation that is both prosperous and progressive.
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JAMES K. GALBRAITH holds the Lloyd M. Bentsen, Jr., Chair in Government/Business Relations at the LBJ School of Public Affairs at the University of Texas at Austin. He holds degrees from Harvard and Yale. He studied economics as a Marshall scholar at King's College, Cambridge, and then served on the staff of the U.S. Congress, including as executive director of the Joint Economic Committee. He directs the University of Texas Inequality Project, an informal research group at the LBJ School, is a senior scholar of the Levy Economics Institute, and is chair of Economists for Peace and Security, a global professional association.Excerpt. © Reprinted by permission. All rights reserved.:
Whatever Happened to the Conservatives?
Does anyone else recall the days when to be an economic conservative in the United States meant something? As a young liberal on the congressional staff a long time ago, I remember them in vivid frustration. The 1970s saw the rise of two distinct conservative movements, the supply-siders and the monetarists: radical tax cutters and deregulators on one side, apostles of strict control over the money stock on the other. Their rise culminated in the Reagan revolution of 1980, which brought them both into high office. This was personal: the conservative alliance devalued my Keynesian education, obstructed my career, and deprived me and my few comrades on Capitol Hill of purchase on the levers of power. It was difficult politically. As executive director of the Joint Economic Committee in 1981, I organized a largely futile frontline resistance. But intellectually it was even worse. However much one disagreed with them, these were people who believed. They were idealists. They had the force of conviction. Worse still, they were setting the agenda. And there was the thought: Suppose they were right?
The Reaganites offered up a famous combination of policies that had grown largely from seeds planted in the academy during the long years of liberal rule. The central element was reduction of taxes on wealth, intended to unlock the productive powers of capital, spurring saving and investment. Tight money was intended to end inflation quickly, brutally if necessary. And with this came a wide-ranging assault on government, regulation, and unions, whose purpose was to let market forces -- and private capitalists -- rule.
Except among the immediate victims, the great conservative ideas for a time had wide appeal. Some of it was scientific. For each problem, they offered a solution. Each solution was rooted in the attractive vision of free individual economic choice, coordinated only by the marketplace and the gentle persuasions of price. The solutions had scholarly credentials; they were rooted in the economics my generation had imbibed in graduate school. For that reason, President Reagan was able to draw on some of the most prominent economists in the country, not all of them ideologues by any means. Murray Weidenbaum and Martin Feldstein were his first chairs of the Council of Economic Advisers, and even young tyros Lawrence Summers and Paul Krugman, who each came in for a year under Feldstein, would serve in his administration. Nobody of remotely comparable talent would work under George W. Bush.
In addition to intellectual legitimacy, the popularity of the conservative viewpoint in those days had an emotional, even a romantic, aspect. The conservatives promised prosperity without the trouble of planning for it, achieved through a simple three-step program: cut taxes, end inflation, and free the market. At a deeper level, they promised an end to a kind of politics that many in elite circles -- frankly in both major parties -- had come to loathe: the politics of compromise, redistribution, and catering to the needs and demands of minorities and the poor. America in 1980 had compassion fatigue. The conservative agenda promised, perhaps more than anything else, to make compassion redundant. In addition, it was audacious, radical, flashy -- a program with sex appeal. Suddenly it was the conservatives who were the brave and brash bad boys of American culture, while liberals like myself had become the country's killjoys, young fogies hopelessly in the grip of old ideas.
What is left of all this, twenty-five years on? Essentially nothing. The election of November 7, 2006, swept conservative Republicans from their majorities in both houses of Congress and signaled a new skepticism about entrusting government to those who profess to despise it. Plainly the public no longer believes what conservative leaders say about free markets. The death of Milton Friedman ten days later symbolized the era's end. Yet as the Wall Street Journal's own Friedman obituary conceded, policymakers had long previously discarded the practical substance of his ideas. Central banks do not attempt to control the money supply. Regulation has been reinstated in finance, and the facts of climate change make a new era of environmental interventions inevitable, sooner or later. Meanwhile, the world has given up waiting for tax cuts to unleash the hidden creativity of the business class.
The issue today is not whether the great conservative ideas once had appeal or a foundation in reputable theory. The issue is whether they have a future. And on that point, there is general agreement today, largely shared even by those who still believe passionately in the conservative cause. The fact is that the Reagan era panoply of ideas has been abandoned as the intellectual basis of a political program. There are almost no monetarists left in power. There are no convinced supplysiders (though the catechism is still occasionally recited). There are no public intellectual leaders in any campaign for "free markets" and against regulation. "Free trade" has been reduced to a label, pasted over trade agreements that are anything but "free." The economic conservative still reigns supreme in the academy and on the talk shows, but in the public realm, he is today practically null and void. He does not exist. And if he were to resurface today in the policy world, offering up the self-confident doctrines of 1980, he would be taken seriously by no one.
Today, in the great policy house of the conservatives, there are only lobbyists and the politicians who do their bidding. There are slogans and sloganeers. There are cronies and careerists. There are occasional fix-it men who are called in when major disasters have to be repaired. There are people who predict disaster, quite routinely, in order to justify the destruction of Social Security and other popular programs, for the transparent purpose of turning them over to friends on Wall Street. Mercifully few believe them, though that does not end the danger, for they represent forces whose power does not rest on persuasion. There are university economists who can be tapped, as ever, for high public office, but they plainly lack convictions. Once in office, they come and go, doing nothing to advance the conservative case. In public view, the conservative house stood for a long time, a mansion visible from all parts of the landscape. But inside, the place was decrepit; its intellectual foundation had collapsed. A few true believers continued to live there, but it was not any great surprise, even to them, when it fell down.
What are the Reagan conservatives doing today? Milton Friedman himself, the father of monetarism, in 2003 repudiated his own old policy doctrine: "The use of quantity of money as a target has not been a success....I'm not sure I would as of today push it as hard as I once did," he told the Financial Times. In the face of the complete collapse of the evidence on which they had based their case linking money growth to price change, the other monetarists have mostly dropped the topic or passed on. Practically everyone today agrees: the Federal Reserve sets the short-term interest rate, and it is interest rates, not the money stock, that drive the economy. Indeed, the Federal Reserve recently quietly ceased to publish certain monetary statistics in which the academic world had lost interest (and no one else ever had any).
Jude Wanniski, the original supply-sider, died at age sixty-nine in late 2005. He never stopped being a supply-sider and, I think, a true believer. But from 2001 onward, he devoted himself to opposing, eloquently, the neoconservative wars; he and I became friends and even coauthored an article on one occasion. It was joint antimonetarist advice--from the "first supply-sider" and the "last Keynesian"--to the Federal Reserve against raising interest rates. George Gilder, who scourged the poor and celebrated wealth in the early 1980s, went on to become a guru of the technology revolution in the 1990s; when the tech boom collapsed, so did the market for his stock-picking skills. Paul Craig Roberts, assistant secretary of the treasury for economic policy in the Reagan administration, later author of The Supply-Side Revolution and a columnist for Business Week, has become a vehement voice against the Iraq war, the building threat of a war with Iran, and the assault on civil liberties that is part of the "global war on terror." Bruce Bartlett, once an avid young supply-sider and author of Reaganomics, remains an old-fashioned advocate of the most forlorn cause in modern history: small government. In 2005 he published a book entitled Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Revolution.
Perhaps the greatest conservative true believer was the Old Objectivist himself, Alan Greenspan, for eighteen years chairman of the board of governors of the Federal Reserve System. Though never a monetarist, Greenspan assiduously favored tax cuts, spending cuts, and deregulation. In office he always deferred to the avatars of free markets, refusing to use his judgment or his soapbox or his regulatory power against speculative bubbles in technology and housing. His philosophy on these matters was that markets are like that and the job of government is to clean up the mess after the crash. Yet in his monumental recent confessions, The Age of Turbulence, Greenspan delivered his verdict on the Republicans of 2006: "They traded principle for power and ended up with neither. They deserved to lose."
It is fashionable today to dismiss the Reagan conservatives, including those I have mentioned, as swindlers, the mere tools of the monied interests who backed them. This is the approach taken, for instance, by New Republic senior editor Jonathan Chait in his new book, The Big Con, while Paul Krugman in his new book, Conscience of a Liberal, tends to treat them as either swindlers or fools. I have no objection to the political economy of those books; money does talk. But I do ...
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