This report traces the
roots of the current financial crisis to a faulty U.S. macroeconomic paradigm. One flaw
in this paradigm was the neo-liberal growth model adopted after 1980 that
relied on debt and asset price inflation to drive demand. A second flaw was the
model of U.S.
engagement with the global economy that created a triple economic hemorrhage of
spending on imports, manufacturing job losses, and off-shoring of investment. Deregulation
and financial excess are important parts of the story, but they are not the
ultimate cause of the crisis. Instead, they facilitated the housing bubble and
are actually part of the neo-liberal model, their function being to fuel demand
growth based on debt and asset price inflation. The
old post-World War II growth model based on rising middle-class incomes has
been dismantled, while the new neo-liberal growth model has imploded. The United States
needs a new economic paradigm and a new growth model, but as yet this challenge
has received little attention from policymakers or economists.
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