It’s really quite fascinating to think about this remarkable chain of ideas and events–from the rise of hyper-rational economics in the 1970s, through middle-class stagnation, two bubbles-and-busts, global financial innovations and explosions, Keynesian stimulus, to the Tea-Party-led attack on government spending.

Bill_with_GraphIt will help to start out with a brief, truncated-if-not-reductionist history of the ideas and policy decisions that led up to this moment.

In the 1970s, the collision of high unemployment and high inflation put the dominant Keynesian economics on the ropes and gave rise to a new model that had, at its core, self-correcting markets and distrust of government intervention or oversight.

In the 1980s, Reaganomics enshrined this model in public policy, with large supply-side tax cuts and deregulation. The cuts failed to “pay for themselves” and deficits grew. Middle-class incomes and wages stagnated and income inequality, which had begun to rise in the mid-70s, accelerated.

In the 1990s, Clintonomics generally stuck with the deregulatory regime. Alan Greenspan et al continued the intellectual tradition of self-correcting markets. We also raised taxes at the high end. Growth accelerated, generating lots of jobs and a budget surplus. But a key source of growth, the bubble, burst at the end of the decade, causing a recession.

In the 2000s, we got a hard shift to trickle-down, supply-side economics, and large tax cuts. Financial engineering, goosed by deregulation and the ever-deepening belief in self-regulating markets led to cheap credit, underpriced risk, and over-leverage. After the bubble popped, the real estate industry inflated.

Then, the housing bubble burst in 2007, leading to widespread defaults that brought down banks large and small, froze credit markets, left millions of families stuck in homes with collapsing values, and ultimately drove our economy into the Great Recession.

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Source: Jared Bernstein | The Atlantic