Looking at Claims that Financial Deregulation Promotes Economic Growth

(Posted 11/08/2011) - Whether you agree with Paul Krugman's economic theory or not he tries to buttress his beliefs with factual argument -- always a good thing.

Those who argue that the benefits (economic growth) of financial deregulation have outweighed the downsides (the market busts) need to respond to the critique posted here.

It seems pretty obvious the economic gains being touted by degregulation proponents are enjoyed by a select minority (based on this US census data). Here's the excerpted article by Krugman ....

Let me start with a puzzle: why did faith in the wonders of financial deregulation persist so long?

After all, if you step back from the record, deregulation began producing disasters from early on. Early deregulatory moves helped bring on the Latin American debt crisis of the early 1980s; Garn-St. Germain produced the savings and loan debacle; freed-up capital flows produced the Asian crisis and LTCM; and now we have the great bust. So why were Very Serious People so convinced that it was a good thing?

Well, the answer from the usual suspects has always been that the era of deregulation was also an era of unprecedented economic growth. A while back I noted how Peter Wallison - one of the prime movers behind the Big Lie on the causes of the crisis - claimed that

Indeed, the modern era of rapid economic growth commenced after both Democratic and Republican presidents undertook to lift costly and stultifying New Deal regulations.

Similarly, Eugene Fama asserted that

Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It's reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth.

The point is that these are pure fantasies on the part of the right. The true age of spectacular growth in the United States and other advanced economies was the generation after World War II, with post-Reagan growth nowhere near comparable. So why do these people imagine otherwise?

And the answer, once you think about it, is obvious: growth for whom? There's only one way in which the post-deregulation boom was exceptional, and that's in terms of the growth in incomes at the top of the scale.

Here's a comparison of the postwar boom with the deregulation alleged boom, using real average family income from the Census and real average income for the top 1 percent from Piketty and Saez:

Click on the image to Enlarge ....

If you're looking at the average, the last generation is a poor shadow of the postwar boom. But if you're talking about the 1 percent, wonderful things have happened.

No wonder then, that Very Serious People - who, after all, get to be considered Very Serious because the elite likes them - have retained faith in deregulation despite repeated disasters.