For quite a while, I’ve been arguing that the simultaneous occurrence of sustained depression in most developed countries provides fairly conclusive evidence that both new classical macroeconomics and standard versions of real business cycle theory cannot explain actual macroeconomic outcomes. That argument is directed both against US-based economists like Casey Mulligan and Narayana Kocherlakota, who are trying to explain the US experience in terms of problems specific to the US labor market and to European advocates of austerity who blame the crisis in peripheral European countries on (mostly falsely) alleged government profligacy in those countries.
An immediate implication, drawn out here by Paul Krugman, is that the success or otherwise of the limited stimulus undertaken by the Obama Administration should be assessed by comparison to the performance of other countries, most of which undertook less stimulus, returned to austerity faster, and have experienced correspondingly weaker growth (as some Oz tweeps are pointing out, he might have mentioned Australia, which undertook a big stimulus and avoided recession altogether).
But, as Megan McArdle snarks here, there’s an implication more appealing to Republicans. If Obama can’t be blamed for a global recession, neither can Bush. Although McArdle’s argument isn’t watertight (the US is big enough that US actions have a big effect on the world as a whole), the conclusion is broadly correct. There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share. Bush’s main contribution was to introduce unfunded tax cuts at a time when the budget should have been in surplus, thereby reducing the fiscal space available for stimulus when the crisis came. But, given the weakness of the stimulus and the ferocity of the political response, it’s not clear that was a binding constraint in any case.
The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit from the finance-dominated form of capitalism that produced the crisis and has prevented any recovery. My book Zombie Economics is a critique of market liberalism considered as an economic theory, showing how market liberalism produced the crisis. Colin Crouch’s Strange Non-Death of NeoLiberalism gives more of the class interpretation, explainign why these discredited ideas remain dominant.