James Galbraith Offers a Way Forward in a Low-Growth World

Declaring the end of normal, the U.S. economist in his new book makes a case for creating employment by boosting social spending.


Economist James Galbraith has grim news for businesses and policymakers hoping that the global economy will shake off the effects of the 2007–’09 financial crisis. In his ninth book, The End of Normal: The Great Crisis and the Future of Growth, he argues that the world must get used to modest expansion at best.

Four things prevent a return to “normal,” according to Galbraith, a professor of government at the University of Texas at Austin’s Lyndon B. Johnson School of Public Affairs: the high cost of natural resources, an unstable economic system, unemployment created by digital technologies and changes to the financial system. The latter “has moved toward statistically driven, corrupted processes that ultimately led to the meltdown,” he says.

Galbraith entered the same field as his famous father, John Kenneth Galbraith, a Harvard professor and member of four Democratic White House administrations, earning a Ph.D. in economics from Yale University in 1981. In his view, the idea that postcrisis economies can return to precrisis growth became invalid in the 1970s — a reality masked by events like the ’90s tech boom.

But there is hope, Galbraith maintains. A Keynesian who believes in strengthening safety nets such as Social Security and Medicaid, he calls for the creation of new institutions similar to those launched in the wake of the Great Depression. Galbraith, 62, recently spoke with Senior Writer Frances Denmark.

How far back do you trace the roots of the latest financial crisis?

The difficulties started emerging in the 1970s. In the 1980s economic problems were mostly displaced [from the U.S.] to the rest of the world. You observed them if you traveled in Latin America or Central or Eastern Europe or, ultimately, in Asia.The difficulties for the U.S. started after the collapse of the Nasdaq in 2000. From that point onward we are part of the same set of problems.

What role did the U.S. financial system play in creating today’s economic woes?

It became easier and easier to undermine the standards. By the time the crisis exploded, the standards had long since been wiped out entirely. The constraints on banks from the regulators had been largely removed. The financial sector was deregulated and de-supervised. You then had a sector where the dominant actors are the most aggressive and the most thoroughly corrupt ones: for example, the private-label mortgage originators like Countrywide and Ameriquest.

What is your view on regulation of financial institutions?

It needs to be thought of in terms that go beyond the question of regulation. The regulatory framework got blown apart along with the sector itself. The issue that we are facing there is much more one of institutional resizing and repurposing than of regulating the institutions that we have now. Part of the problem is you’ve got a half a dozen, maybe seven big banks dominating that sector, and are they really regulatable? There’s an open question as to whether they can even be controlled from their own executive suites, let alone have effective outside supervision, because they are such large, complex and opaque transnational institutions.

You write that, rather than cut costs by trimming social institutions, we should cut back on the military.

My point in making those arguments is that there is a case for austerity in certain respects. Not in the way that argument has been framed in attacks on the social welfare state but in the sense that when a society has large, costly [public and private] institutions that aren’t doing anything but are consuming real resources, particularly real resources that have to be paid for from outside, that tends to be a burden on other forms of private business and on the profitability and the capacity of the economy to grow as a whole.

What does the economic future look like, and how might we get there?

The private financial sector has ceased to serve as a motor of growth. It is bloated in relation to the economy, and it isn’t geared toward doing many of the things that need doing. It’s not in the business plan of the banking sector to support new private sector job creation, for example, or restore the credit of the household sector. Private credit markets are stagnant, and there has been no full recovery of demand. But companies are swimming in cash.

Why not build factories or buy equipment? We also need to think more about how to organize lives so that the human resources we have are first of all used effectively and secondly supported. We can create institutions that will provide employment in areas where it continues to be needed and useful, of which there are a very large number of possibilities. We need to engineer the economy to grow at a stable, low, positive rate for a long time and adjust ourselves materially to that prospect.

Follow Frances Denmark on Twitter at @francesdenmark.